JPMorgan, Citigroup Peso Calls Made Obsolete as Plummet Deepens

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Currency forecasters can’t cut their Mexican peso calls fast enough. And that’s bad news for the country’s overseas bond investors.

The peso weakened past 16 per dollar to a record low on Monday. That was just days after JPMorgan Chase & Co. and Citigroup Inc. predicted the currency would slump to that level by the end of the third quarter. They’re not the only banks that have seen their projections overrun by the peso’s free-fall. At the start of the year, analysts surveyed by Bloomberg said the currency would actually strengthen.

The swoon is threatening to spur an exodus by foreign investors already stung by losses that are twice the emerging-market average in the past three months. The peso has fallen 4 percent in the past month, the most in Latin America after Colombia’s currency, as the slump in oil prices undermines growth in Mexico’s economy.

“The peso has declined very quickly, and everybody’s been surprised by the speed of the move,” Sergio Luna, the chief economist of Citigroup’s local unit, said from Mexico City. “Expectations of an additional weakening may eventually lead some bond investors to exit.”

Mexico’s fixed-rate local bonds have lost 3.5 percent in dollar terms in the past three months, data compiled by Bloomberg show. Foreign holdings of all peso-denominated government debt have slipped to 36.2 percent from 36.7 percent in April, based on the most recent data from the central bank.

Peso Outlook

The Mexican currency extended its decline Wednesday, falling to as low as 16.1469 per dollar, the weakest intraday level since the 1993 creation of what was called the nuevo peso.

Marco Oviedo, an economist at Barclays Plc, predicts the peso will drop to 16.5 per dollar by year-end, the most bearish projection among 29 analysts surveyed by Bloomberg.

“As long as we see those short-term pressures, it’s going to erode those returns” in peso bonds, Oviedo said.

To Invesco Ltd.’s Sean Newman, Mexico’s move to open its oil industry to private investment for the first time in seven decades, its efforts to boost telecommunications competition and its trade links with the U.S. will bolster peso-bond returns over the long term.

‘Pulled Along’

“Mexico will benefit from its reforms, and with the U.S. economy recovering, Mexico will be pulled along,” Newman, who helps manage $800 billion including local-currency Mexico debt, said by telephone from Atlanta.

Still, JPMorgan cited Mexico’s “disappointing” auction of oil blocks last week -- the first step in the nation’s historic push to jettison the state-controlled petroleum monopoly -- when it decided to revise its peso forecast lower.

With only two of 14 blocks drawing high enough bids to warrant contracts, projections for foreign-direct investment would have to be chopped, the New York-based bank said.

Like Citigroup’s Luna, JPMorgan economist Gabriel Lozano is also sticking with his peso forecast. But that doesn’t necessarily mean he’s optimistic.

“We have to recognize that there’s not much space to be bullish about the peso in the short term,” Lozano said.